Commodity Markets Outlook - January 2014

Submitted by John Baffes On Thu, 01/30/2014

co-authors: Damir Cosic

The World Bank just published its January 2014 Commodity Outlook. With the exception of energy, all the key commodity price indices declined significantly in 2013. Fertilizer prices led the decline, down 17.4 percent from 2012, followed by precious metals (down almost 17 percent), agriculture (-7.2 percent), and metals (-5.5 percent).

Crude oil prices (World Bank average), averaged $104/barrel (bbl) during 2013, marginally lower than the $105/bbl average of 2012. US natural gas prices, which historically have been at similar levels with those of crude oil, began diverging in the mid-2000s, and are now close to coal prices.

Interestingly oil price volatility has declined considerably. In fact, the past 3 years has been one of the least volatile periods of the past 25 years. Moreover, the high volatility episode during 2008/09 was related more to the financial crisis rather than supply concerns. On the contrary, a similar spike in oil price volatility during in the early 1990s was related to disruption supply concerns associated with the first Gulf war.

In the baseline scenario, which assumes no macroeconomic shocks or supply disruptions, oil prices are expected to average $103/bbl in 2014, just 1 percent lower than the 2013 average. Agricultural prices are projected to decline a further 2.5 percent in 2014 under the assumption that the existing improved crop conditions will continue for the rest of the year. Specifically, prices of food and beverages are expected to drop by 3.7 and 2.0 percent—raw material prices will not change much. Metal prices will decline an additional 1.7 percent in 2014 as new supplies are expected to come on board. Fertilizer prices are expected to decline almost 12 percent in 2014, on top of the 17.4 percent decline in 2013, mostly due to new fertilizer plants coming on stream in the U.S., in turn a response to low natural gas prices. Similarly, precious metals are expected to decline more than 13 percent in 2014 as institutional investors increasingly consider them less attractive “safe haven” alternatives.